These days in cannabis, we see lots of toll processing agreements between licensees. And that’s for good reason– not every licensee wants to be vertically integrated, which is expensive and significantly complex. Most licensees simply want the benefits of being able to offer a variety of products that they can’t otherwise directly make themselves. How do they accomplish that? In a variety of ways, including intellectual property licensing and contract manufacturing; but today I focus on the specific basics of toll processing agreements.
What is a toll processing agreement? It’s a contract between two parties in which a “toller” agrees to manufacture a customer’s product (usually derived from raw materials supplied by the customer) for an agreed upon fee (i.e., the “toll”). Toll processing agreements are different than contract manufacturing where, with contract manufacturing, the manufacturer usually supplies the raw materials, itself, and also has the most say over processes, third party vendors, and quality conditions.
Toll processing agreements should be mutually beneficial between the parties:
The customer receives a customized product (potentially with on-demand services) without the headache and capital outlay of having to make the product itself. The customer also gets say over product integrity and customization, quality